The Changing Transmission Mechanism of U.S. Monetary Policy

44 Pages Posted: 17 Aug 2016

See all articles by Norhana Endut

Norhana Endut

Central Bank of Malaysia

James Morley

University of Sydney

Pao-Lin Tien

Bureau of Economic Analysis; Board of Governors of the Federal Reserve System; Wesleyan University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2016

Abstract

We examine the relative importance of the interest rate, exchange rate, and bank-lending channels for the transmission mechanism of monetary policy in the United States over the past fifty years. Our analysis is based on a structural vector autoregressive model that includes bank loans and uses sign restrictions to identify monetary policy shocks. Given these identified policy shocks, we quantify the relative importance of different transmission channels via counterfactual analysis. Our results suggest a nontrivial role for the bank-lending channel at the aggregate level, but its importance has been greatly diminished since the early 1980s. Despite the timing, we find no support for a link between this change in the transmission mechanism and the concurrent reduction in output volatility associated with the Great Moderation. There is, however, some evidence of a link to the reduction in inflation volatility occurring at the same time.

Keywords: Bank-Lending Channel, Sign Restrictions, Monetary Policy Shock, Great Moderation

JEL Classification: C32, E52

Suggested Citation

Endut, Norhana and Morley, James and Tien, Pao-Lin, The Changing Transmission Mechanism of U.S. Monetary Policy (August 1, 2016). Available at SSRN: https://ssrn.com/abstract=2823666 or http://dx.doi.org/10.2139/ssrn.2823666

Norhana Endut

Central Bank of Malaysia ( email )

Jalan Dato' Onn
P.O. Box 10922
Kuala Lumpur, 50929
Malaysia

James Morley

University of Sydney ( email )

Rm 370 Merewether (H04)
Sydney, NSW 2006 2008
Australia

HOME PAGE: http://https://sites.google.com/site/jamescmorley/

Pao-Lin Tien (Contact Author)

Bureau of Economic Analysis ( email )

1441 L Street NW
Washington, DC 20910
United States

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Wesleyan University - Department of Economics ( email )

238 Church Street
Middletown, CT 06459-0007
United States

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